The enhancements to regulatory standards are supportive of ratings for North American life insurers, which are generally expected to maintain strong balance sheets, according to Fitch Ratings report. Beinsure analyzed the report and highlighted the key points.
Increased complexity within the life insurance sector, including growth in offshore reinsurance, alternative investment manager tie-ups and higher allocations to illiquid structured assets has led to a highly dynamic regulatory environment in North America.
Recent block reinsurance transactions are mostly neutral to ratings. Cedants often experience an improved business risk profile, which is offset by reduced diversification.
The National Association of Insurance Commissioners (NAIC) initiatives focus on increasing transparency and enhancing monitoring to ensure an appropriate understanding of insurers’ risk. Initiatives include the bond classification project, CLO capital charges, asset adequacy testing for reinsurance transactions and private letter ratings of investment securities.
U.S. life insurance reserves ceded by countries
North American life insurer credit losses will remain benign in 2025, despite modest increases due to ongoing pressure on commercial real estate (CRE) assets, reflecting secular shifts and macroeconomic trends.
Commercial real estate losses will continue to gradually emerge but are expected remain within ratings expectations relative to capital.
Commercial real estate exposure, while significant, is diversified across property types, geographies and maturities, with performance supported by track records of strong performance through multiple cycles based on disciplined underwriting.
U.S. life insurers are prepared for lower interest rates, with stable earnings and capital that will remain within rating thresholds. U.S. life insurers, with their substantial fixed-income portfolios, stand to benefit from these dynamics, as well as alleviating the unrealized losses that have emerged post-pandemic with the Fed’s monetary tightening.
Although portfolio yield growth for rated life insurers will slow with rate cuts, outcomes will depend on the yield curve’s shape and changes in credit spreads from their current, historically low levels.
U.S. life insurers have nearly doubled their ceded reserves
Regulatory bodies, including the NAIC in the United States and the Bermuda Monetary Authority, have introduced reforms to enhance transparency and align with the industry’s rapid growth.
U.S. life insurers have nearly doubled their ceded reserves since 2019, increasing from $710 bn to $1.3 tr in 2023 and during the same period, reserves ceded to offshore jurisdictions have nearly quadrupled, exceeding $450 bn.
The pursuit of higher yields, combined with long-duration and illiquid liabilities, has fueled acquisitions and partnerships between life insurers and alternative investment managers. Fitch expects this trend to continue in 2025.
Increasing exposure to less-liquid private assets with complex structures, such as CLOs, can heighten investment and asset risk. This factor is considered in Fitch’s evaluation of the Investment and Asset Risk key rating driver.
U.S. individual life insurance premium is on track
U.S. individual life insurance premium is on track to reach a record $16 bn in 2024 and continue growing in the current year, as the market continues riding a bounce first seen during the COVID-19 pandemic, according to LIMRA Report.
Market conditions are very favorable for the individual life insurance market. In 2024, we expect total premium to be level with or above the record set in 2023 (up 1% to 5%).
Following solid third quarter results and strong preliminary October sales figures, LIMRA expects 2024 will mark the fourth year of record-high new premium collected for the industry. Barring an unforeseen economic downturn, LIMRA is forecasting life sales to grow in 2025.
While interest rates are dropping, the decline may not be as severe as anticipated and reduced rates could relieve pressure on indexed universal life and whole life, according to Global Economic and Insurance Market Outlook.
The group is forecasting rising equity markets, coupled with lower inflation and unemployment, will be tailwinds for the industry this year.
Interest rates have had a negative impact on WL sales and rising interest rates have shifted sales toward products with longer premium payment periods. LIMRA is forecasting WL sales to decline through year-end 2024 and grow by 1% to 5% in 2025 as the yield curve reverts to normal.
U.S. life insurers investment portfolio
Rising interest rates are expected to continue to reduce investment maintenance reserve (IMR) balances for largest U.S. life insurers. However, stable investment portfolios, strong liquidity and effective asset-liability management will mitigate the negative effects on statutory capital and cash flows.
Adjusted to reflect negative IMR balances as admitted liabilities, RBC ratios for Fitch’s rated universe increased 3 percentage points to 450% on an aggregate basis.
Insurers most affected at YE2022 were Prudential Financial, OneAmerica Financial Partners, Principal Financial Group, and Massachusetts Mutual Life Insurance Company.
Favorably for the industry, the NAIC recently adopted guidance allowing for the statutory admittance of net negative IMR balances, according to US Life & Non-Life Insurance Market.
Realized losses transferred to IMR in 2023 totaled $17.3 bn, with reserve balances down $6.3 billion YTD through 2024 to $16 bn.
Amid high inflation pressuring loss costs, life insurers have increased liquidity, with cash and short-term holdings at 7% of industry invested assets.
Insurers’ ratings are likely to be resilient to a moderate fall in commercial real-estate (CRE) values, Beinsure says in a report, although a systemic crisis would put greater pressure on individual issuers with larger exposures.
FAQ
Regulatory reforms support insurer ratings by improving transparency and risk monitoring. The NAIC and Bermuda Monetary Authority have introduced initiatives such as asset adequacy testing and new capital charges for CLOs to ensure stability.
Increased offshore reinsurance, partnerships with alternative investment managers, and higher allocations to illiquid structured assets have contributed to a rapidly evolving regulatory environment.
Most block reinsurance deals are neutral to ratings. While cedants may benefit from an improved business risk profile, this is balanced by reduced diversification.
Higher exposure to less-liquid private assets, such as CLOs, increases investment and asset risks. These risks are factored into Fitch’s assessment of insurers’ financial strength.
Lower interest rates may stabilize earnings and capital levels within rating thresholds. Fixed-income portfolios are positioned to benefit from declining rates, helping to reduce unrealized losses.
U.S. individual life insurance premiums are projected to hit a record $16 bn in 2024, with continued growth expected in 2025, driven by favorable market conditions and rising equity markets.
While CRE losses are emerging, they remain within rating expectations. Diversified portfolios, disciplined underwriting, and strong liquidity help mitigate risks associated with a downturn in the CRE market.
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AUTHORS: Jamie Tucker – CPA, CFA, Senior Director, Life Insurance Fitch Ratings, Jack Rosen – Director Fitch Ratings, Laura Kaster – CFA, Senior Director, Fitch Wire (North and South American Financial Institutions)
